What You Need to Know about Whole Life Insurance

Have you been thinking about purchasing a participating whole life insurance cover? If so, this is an ideal way to protect your loved ones in the event of your untimely demise. But before taking this route, it always pays off to understand what you’re dealing with in the first place.

Well, Whole life insurance, also known as traditional life insurance, offers permanent death benefit coverage for the life of the insured. Aside from paying a death benefit, it also contains a savings component in which cash value may accumulate. Interest accrues at a fixed rate and on a tax-deferred basis.

Actually, whole life insurance policies are merely one type of permanent life insurance. Variable universal insurance, indexed universal life and universal life are the others. Keep in mind whole life insurance is paid out to a beneficiary or beneficiaries upon the insured’s death, provided the policy was in force.

The policy includes a savings portion, called the ‘cash value,’ alongside the death benefit. In the savings component, interest may accumulate on a tax-deferred basis. No wonder growing cash value is a vital component of whole life insurance.

For you to build cash value, you can simply remit payments more than the scheduled premium. Policy dividends can also be reinvested into cash value and earn interest. Over time, the dividends and interest accrued on the policy’s cash value will often offer a positive return to investors, growing larger than the total amount of premiums paid into the policy.

To access cash reserves, the policyholder requests a withdrawal of funds or a loan. Interest is charged on loans with rates varying per insurer. Furthermore, the owner may withdraw funds tax-free up to the value of total premiums paid. Unpaid loans tend to reduce the death benefit by the outstanding amount.

The Bottom Line

Bear in mind whole life insurance is different from term life insurance, which only offers coverage for a certain number of years, rather than a lifetime, and only pays out a death benefit. Term life doesn’t have a cash savings component.